Valuations Down for Later-Stage Cleantech Startups

We knew that cleantech startups were getting less venture-capital funding, but it looks like later-stage companies are really suffering. At the Financing the Cleantech Vision conference hosted by Thomson Reuters’ Venture Capital Journal in Palo Alto, Calif., on Thursday, Virgin Green Fund partner Anup Jacob said that valuations for later-stage solar companies have been down 50 to 80 percent since the economic downturn began in the fall. And Kevin Skillern, a managing director of GE Energy Financial Services, said at the event that wind and solar valuations are down 50 to 70 percent, with an 80 percent decline in deal volume.

The down rounds — venture-capital rounds in which a company is valued lower than it was worth in previous rounds — can be low enough to essentially wash out companies’ first two rounds, Jacob said. They are causing exiting investors to tighten their belts and get pickier about their investments. For companies looking for their third rounds or higher, Virgin Green Fund is only funding deals with companies that expect the current round to be their last, and also is looking for valuations that are tied to earnings in some way, Jacob said.

Down rounds “force you to have conviction around the things you believe should get funding,” Jacob told us. But it also raises the stakes for companies. “I think there’s a lot of undergrowth in the forest that is going to be cleared out here,” he said. “A lot of companies are just not going to survive.”

So far, we have seen some — but not many — venture capital-backed startups shut down in the recession. Brian Goncher, director of the cleantech practice at Deloitte, said that of the approximately 115 venture-backed companies in Silicon Valley, he’s only heard of two situations in which the boards collectively have decided not to reinvest. “That’s pretty good for a CEO of one of these companies if you realize the [low] likeliness of not getting support from at least some of your syndicate,” he said. However, he expects to see more of these situations before the economy turns back up.

Decreased valuations are causing a lot of anxiety among companies that are waiting to find out which of their investors are in or out. It’s also a big decision time for investors, Goncher said. Down rounds are good for new investors, who can get good deals, and for some current investors who decide to reinvest, Goncher said. Of course, existing investors don’t like down rounds because they devalue their initial investments. But they also provide opportunities for investors, who previously thought a company was worth more money, to snap up a higher percentage of the company at a lower price. And investors who drop out lose money.

In general, most down rounds won’t have much of a long-term impact on the companies or investors, as practically no exits are happening now anyway, Goncher said. “Nobody is in a selling mood right now,” he said, adding that he expects initial public offerings and acquisitions will pick up later this year, boosting valuations. “[A down round] doesn’t change the outcome.” Overall, the lower valuations might be leading to a healthier market, he said, calling this “a minor correction” of a bubble of some too-high valuations in the past and “a good thing.”

Mark Kalpin, a partner in the emerging energy technology group at law firm WilmerHale, compared the situation to what happened to telecom investments several years ago. “There’s an initial exuberance in investing, and then it’s tempered by business realities about what the future looks like for these companies,” he said. “I think we’re just seeing normal skittishness of people to invest in these times as well. People are just being more cautious than they were two years ago.”